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PROJECT MANAGEMENT
Project Evaluation
CLASS ACTIVITY 6For your particular project each group shall itemise the project’s cost and evaluate the worth of the project using NPV method. The interest shall be at 10%
Each group shall have 5 minutes to present its finding.
Marks will be given based on the presentation
AIM OF EVALUATION• To determine whether the a project is
economically viable
TOOLS OF EVALUATION• Net Present Value Method (NPV)• Internal Rate of Return Method (IRR)• Equivalent Uniform Annual Cost Method
(EUAC)• Cost Benefit Analysis Method (CBA)
WHAT DOES NPV DO?• It calculate the value of the project at the
time of evaluation
WHAT DOES IRR DO?• It calculate the rate of return of the project
WHAT DOES EUAC DO?• It calculate the equivalent uniform annual
cost of the project.
WHAT DOES CBA DO?• It calculate the benefit-over-cost ratio of
the project.
BUT WHY DIFFERENT TYPES?
WHEN TO USE NPV?• To know the total worth of the project
WHEN TO USE IRR?• To compare the rate of return of the
project against some preferred rate
WHEN TO USE EUAC?• When the investor is concern on the
amount of money to be acquired/allocated annually/periodically to maintain the project.
WHEN TO USE CBA?• When the evaluation requires the use of
social interest rate
WHAT IS SOCIAL INTEREST RATE?
• Rates applicable to socioeconomic projects
WHCH ONE IS SOCIOECONOMIC PROJECT?
• Public investment project
EXAMPLE OF PUBLIC INVESTMENT PROJECT?
• Penang Bridge• The Blue Mosque• KLIA• etc
HOW TO PERFORM NPV? Step 1
• Determine P, F, A, i, nP0 = initial costF = +ve or –ve discrete paymentA = uniform periodical paymenti = interest raten = project life
CALCULATING NPV – Step 2• Put P, F, A, I and n on a cashflow diagram
C/flow
F
n
i = x% per yearA2
0
P0
A1
1 2 3 4 5 10
CALCULATING NPV – Step 3• Convert A1 and A2 into its equivalent value
at n = 0• i.e into another P value• Where P = A(P/A/i/n)
Discounting factor
Read the discounting factor from an interest table
Interest table
Top part of the interest table
Top part of the interest table
CALCULATING NPV – Step 4• Convert F into its equivalent value at n = 0• P = F(P/F/i/n)
CALCULATING NPV – Step 5• Add all P to give NPV, i.e• NPV = -P0 – A1(P/A/i/n) + A2(P/A/i/n)
+ F(P/F/i/n)
EXAMPLE
• Initial cost = RM64,000.00• Salvage value = RM32,000.00• Yearly income = RM15,000.00• Year maintenance = RM3,200.00• Investment life = 5 yaers• Interest rate = 10%
CASHFLOW DIAGRAM
i = 10% per yearC/flow
32K
n
15K
0
64K3.2K
1 2 3 4 5 10
CALCULATING NPV
NPV = -P0 – A1(P/A/i/n) + A2(P/A/i/n) + F(P/F/i/n)= -64,000 – 3200(3.7908) + 15000( 3.7908)
+ 32000(0.6209)= -64000 – 12130.56 + 56862.00 + 19868.8= 600.24